Fitch Affirms U.S. Bancorp's Ratings at 'AA-' Following Large Regional Bank Review; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed U.S. Bancorp's (USB) ratings at 'AA-/F1+'. The Rating Outlook remains Stable.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), UnionBanCal Corporation (UBC), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS - IDRS, VIABILITY RATINGS (VR) AND SENIOR DEBT

The affirmation of USB's ratings is reflective of an institution that for several years now has set itself apart from peer institutions due to its continued out-performance through the credit crisis and subsequently, which is now focused on furthering its advantages relative to peers.

USB's strong ratings are the result of a number of competitive advantages and a conservative and strong core culture, which have led to better earnings and credit performance than nearly all peer banks over multiple operating cycles.

The company's key competitive advantage is its low-cost deposit base, which allows USB to profitably lower loan prices to win new business. This is important because it brings new banking relationships into the bank, to which the company can then aggressively cross-sell other services. To the extent this cross-sell is successful creates a virtuous cycle in that it fosters much stickier customer relationships, which in turn allow the company to keep deposit costs low, which can attract even more customers to the bank.

In addition to its deposit cost advantage, USB has an operating cost advantage as well. It routinely has an efficiency ratio in the low 50's, better than most peer institutions, which largely helps to support the company's superior earnings performance. As an example, if USB's efficiency ratio was closer to industry averages, its return on assets (ROA) would also be closer to industry averages.

USB complements its core cost advantages with a loan portfolio that is well balanced between commercial and consumer assets. Similar to the loan portfolio, the company's earnings are also nearly evenly balanced between net interest income (NII) and non-interest income.

In this latter category, USB has a leading market share in corporate trust, has increased its mortgage banking market share as others retrenched in the wake of the financial crisis, has a leading and scalable payments and merchant processing business, and is focused on growing its wealth management offerings.

Finally, underpinning all of these advantages is a management team that continuously makes strategic and smart operating decisions and that is responsible for helping to create and sustain the company's core operating culture. Fitch views USB's management team as one of, if not the best, in the industry.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

USB's ratings remain at the very high end of their potential rating range, and there is very minimal upside to current ratings from this level.

Downward pressure on ratings, while not expected, could result from a number of factors. While Fitch would expect some deterioration in credit metrics for USB - as well as the rest of the industry - given today's benign credit environment, should USB's metrics deteriorate at a rate faster than peer group averages there could be pressure on ratings.

Additionally, should USB's earnings performance begin to match peer levels rather than consistently exceed them, this could impact ratings over time.

While Fitch views USB's interest rate risk positioning as neutral, which Fitch views positively from a credit perspective, should the company's performance be negatively affected by a rising rate environment, this could also impact ratings negatively.

Finally, given that management is a key component in Fitch's analysis and views of the company, should there be any significant management changes, a negative rating action could follow.

That said, Fitch does not view this, or any of the other potential negative rating factors as likely.

KEY RATING DRIVERS - HOLDING COMPANY

USB's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities.

RATING SENSITIVITIES - HOLDING COMPANY

Should USB's holding company begin to exhibit signs of weakness, trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely for USB, though, given the strength of the holding company liquidity profile.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that USB may not receive a long-term debt requirement, its ratings may not be affected as a result of Fitch's evolving review regarding notching.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

USB has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, USB is not systemically important and, therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

USB's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by USB and by various issuing vehicles are all notched down from USB or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by USB and its subsidiaries are primarily sensitive to any change in USB's VR.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of USB's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of its main subsidiary banks are equalized across the group.

The IDRs and VRs of USB's other major rated operating subsidiaries are equalized with USB's IDR reflecting Fitch's view that these entities are core to USB's business strategy and financial profile. For USB this mainly includes its Elavon Financial Services entity based in Ireland.

RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

As the IDRs and VRs of the subsidiaries are equalised with those of USB to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in USB's IDRs.

To the extent that one of USB's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from USB's IDR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

USB's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

USB's uninsured deposits outside of the U.S. do not benefit from rating uplift because they do not typically benefit from the U.S. depositor preference unless the deposit is expressly payable at an office of the bank in the United States. Since Fitch cannot determine which foreign branch deposits may be dually payable, they do not get the rating uplift.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by USB and its subsidiaries are primarily sensitive to any change in USB's long- and short-term IDRs.

Fitch has affirmed the following ratings:

U.S. Bancorp

--Long-term Issuer Default Rating (IDR) at 'AA-'; Outlook Stable

--Viability Rating at 'aa-';

--Senior debt at 'AA-';

--Subordinated Debt at 'A+';

--Preferred Stock to at 'BBB';

--Short-term IDR at 'F1+';

--Short-term debt at 'F1+';

--Support at '5';

--Support Floor at 'NF'.

U.S. Bank National Association

--Long-term IDR at 'AA-'; Outlook Stable

--Viability Rating at 'aa-';

--Long-term deposits at AA';

--Senior debt to at 'AA-';

--Subordinated Debt at 'A+';

--Short-term IDR at 'F1+';

--Short-term debt at 'F1+';

--Short-term deposit at 'F1+';

--Support at '5';

--Support Floor at 'NF'.

U.S. Bank National Association ND

--Long-term IDR at 'AA-'; Outlook Stable

--Viability Rating at 'aa-';

--Long-term deposits at AA';

--Senior debt to at 'AA-';

--Subordinated Debt at 'A+';

--Short-term IDR at 'F1+';

--Short-term deposit at 'F1+';

--Support at '5';

--Support Floor at 'NF'.

Elavon Financial Services Limited

--Long-term IDR at 'AA-'; Outlook Stable;

--Long-term deposits at 'AA-';

--Short-term IDR at 'F1+';

--Support at '1';

--Short-term deposit at 'F1+'.

USB Capital IX

USB Realty Corp.

--Preferred Stock at 'BBB+'.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria (Jan. 31, 2014)';

--'Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012)';

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (Jan. 31, 2014)';

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014)';

--'U.S. Banking Quarterly Comment: 2Q14 (July 23, 2014)';

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral) (July 15, 2014)';

--'Risk Radar Global 1Q14 (April 1, 2014)'.

Applicable Criteria and Related Research:

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891914

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com